Critics Say Tax Haven Crackdown Falls Short

Last month the Organization for Economic Cooperation and Development in Paris removed the last holdouts Andorra, Lichtenstein and Monaco from its blacklist of "uncooperative" tax havens. With every OECD-targeted tax haven across the globe now committed to tax "transparency and exchange of information," according to the organization's Committee on Fiscal Affairs, the world seems to have entered a new era.

April's G-20 meeting in London does indeed suggest there is growing political will to penalize foot-dragging tax havens. A recent status report presented to the American Bar Association Tax Section predicted "increasing convergence and prosecution" of "tax evasion and other white-collar crime" and "more pressure on a macro level on offshore centers and large international banks."

But there are also an increasing number of experts who argue the OECD's process, the main vehicle to enact change so far, falls considerably short of a serious attack on the global financial system's many black holes.

"The OECD program is incredibly ineffective," says John Christensen, a British economist who is the director of the Tax Justice Network's International Secretariat, a lobbying group, supported by charities like Oxfam and Christian Aid, that is agitating to close tax loopholes and reform bank and trust "secrecy" rules around the globe.

The core problem? The OECD's prescribed information exchanges are based on a "by request" process that involves submitting a country's evidence of a citizen's tax evasion to the tax haven where the evader is suspected of keeping his bank accounts.

"The evidence request requirements are very high. You have to have a smoking gun. And then there is tremendous discretion within the tax haven's courts as to whether they will comply," says Christensen.

The E.U. tax haven, Jersey, is an island in the channel waters between the U.K. and France. In December, 2008, Jersey Finance, the marketing arm of the offshore financial center in Saint Helier, used its website to reassure banking clients from overseas that Jersey's treaty with the U.S. wasn't much threat to its bank secrecy.

It was "not generally" possible, stated the official website, to compel the disclosure of information "by Jersey subsidiaries and/or branches of UK institutions ... A high threshold therefore exists before the Jersey authorities will accede to a request under a TIEA [Tax Information Exchange Agreement.] For example in the past year, there have been just four requests from the US under the terms of the TIEA. There is no automatic exchange of information under any circumstances and no fishing expeditions' for information."

Jersey quickly removed this revealing paragraph from its Web site, but Washington's so far unsuccessful attempt to force Bern to get
UBS
to release details on 52,000 "John Doe" accounts in Switzerland also seems to support the TJN's critique.

"Switzerland and other tax havens will make huge political noise against the OECD's tax information exchange, but they are quite happy to sign up because they know in practice they don't work," says Christensen.

Hence the TJN's position: Running after tax dodgers and their enablers after the fact is a fool's errand. Genuine transparency and automatic exchange of tax-related information between nation states is the only way to seriously tackle the tax evasion that impoverishes all countries.

The "automatic information exchange agreements" the TJN and other activist organizations are pushing already operate between some E.U. member states. Unlike the OECD's "by request" program, these information processes are automatic and preemptive. The moment a citizen of one state opens a bank account in a neighboring state, the citizen's national tax authority is notified. A spokesman for the OECD points out that the E.U.'s automatic information exchanges are so far limited to just savings accounts, and not other income sources, which are covered in the broader "by-request" protocols of the OECD.

The debate over which of these systems is more effective in curbing tax evasion is becoming increasingly heated. Raymond Baker, director of Global Financial Integrity, publicly mirrored the TJN's position and blasted the OECD's standard as "well meaning but weak;" it left "all elements of the global shadow financial system" in place. An OECD spokesman retorted that Baker's characterization was "misleading," and it was the automatic information exchange agreements that were "cumbersome."

It is a debate heading to the U.S. America currently has an automatic information exchange only with Canada, but Senator Carl Levin (D, Michigan) recently urged the Obama administration to consider reviving regulations originally proposed by the Clinton administration that would allow more such automatic information exchange agreements between the U.S. and other nations. In the meantime, the U.S. and Switzerland have renegotiated their "by-request" information exchange treaty. Tax evasion costs the U.S. government, by some estimates, $100 billion a year in lost revenue.

Companies as much as individuals are on notice. A TJN study released in March revealed that 99% of the largest publicly quoted companies in the U.K., Holland and France used tax-haven subsidiaries to conduct their business, compared with 83% among the largest U.S. firms (as reported in a Government Accountability Office study.) The Cayman Islands is now the world's most favored corporate tax haven, claims the TJN, followed by Ireland, Hong Kong, Luxembourg, Switzerland, Singapore, Bermuda and Jersey.

Ghana is cited as an example of how large and self-interested banks or companies can run circles around the slow-moving OECD. In June, 2005, Barclays Bank signed a memorandum of understanding with the Government of Ghana to help them develop an offshore haven called The International Financial Services Center.

A concept paper for the Ghanaian government was commissioned by Barclays and produced by the bank's consultant, Grant Thornton Mauritius. In June, 2006, Ghana's government signed off on the recommendations, authorizing Barclays and its consultants to develop the proper legal framework, which Ghana's parliament passed into law the following year.

In September 2007, Barclays Bank Ghana Offshore Banking Unit became the first and only such operation in North and West Africa, according to the bank's own press release. An additional law, to expand the regulation so other financial institutions can follow Barclays' lead, is expected to become law in 2009, according to Wilson Prichard, of the The Institute of Development Studies at Sussex University.

Prichard and others believe that Ghana's offshore banking center, next door to oil-rich Nigeria, could do terrible economic damage in the region, as Africa's wealthy use it to further reduce taxable income in their own impoverished nations.

The point: Ghana does not appear anywhere on the OECD's list of tax havens updated on June 8, 2009.

Nicholas Bray, head of Media Affairs at the OECD, says that Ghana is one of four jurisdictions--along with Qatar, Jamaica, and Botswana--that is under review. "The four will be invited to respond to questionnaires," says Bray, their answers eventually to be assessed by the OECD's Global Forum on Tax Transparency.